More businesses in downtown Houston are headed to the western suburbs, a shift some commercial real estate professionals see as a flight to quality outside downtown and others consider an opportunity to redefine an important part of the nation's fourth-biggest city.

Multinational chemical company LyondellBasell is the latest major company with plans to leave downtown as dozens of others move to areas surrounding Houston rather than the central business district. Even business boosters acknowledge the shift has left downtown struggling because “a lot of people are moving west and north, away" from the central business district, according to Steve Triolet, senior vice president of research and market forecasting at national commercial real estate firm Partners in Dallas.

Luring businesses won't be easier after a storm this month shattered windows that could take months to repair, leading to closing of some downtown streets and sidewalks. It comes as some demand is muted by hybrid work policies that allow workers to be remote part of the week, while the easing of the COVID-19 pandemic reminded people returning to the office how much they hated dealing with commutes, Triolet said, in a reflection of shifts taking place in some major cities around the country. Making it harder to keep businesses is downtown's large portfolio of office buildings that are more than 35 years old.

“In the past you could renovate a property but post-COVID you still get high rental rates, but you don’t get the boost in occupancy, partly due to hybrid, but also commute times,” Triolet told CoStar News about downtown’s Houston struggles to fill office space.

That conclusion was backed up by real estate brokerage Savills that, in an office market report published last month, found many companies are flocking to West Houston and relocating “to be closer to their workforce.” Some of the largest lease transactions in 2023 and for the first 90 days of 2024 were in West Houston.

Noble Corp., for example, signed a 110,000-square-foot lease at CityWest Place, and Fluor committed to a 104,000-square-foot space at Two Eldridge, according to Savills. Bechtel Corp., one of the country's largest construction and engineering companies, signed a 77,262-square-foot sublease in the first quarter to expand its presence at 2103 CityWest Blvd. in West Houston, according to Avison Young's market report. Bechtel is relocating its local operations to CityWestPlace, about 8.5 miles west of its home for more than 40 years in the Uptown-Galleria area.

West Houston, the suburban stretch of the city that includes districts west of Uptown and east of Katy, Texas, such as the Energy Corridor and Memorial City, accounted for 50% of the leasing activity in the overall Houston office market in the first quarter, Savills said in its first-quarter report for 2024. Downtown Houston accounted for only 13% of all leasing activity last quarter, according to JLL’s most recent office market report.

North Houston suburbs like the Woodlands, Texas, and southeastern parts of Houston — particularly near NASA — are also experiencing an uptick in office leasing activity.

To be clear, there's still some demand for downtown Houston real estate. One tenant so far has committed to 1550 on the Green, the Bayou City’s newest downtown office tower at 1550 Lamar. Developer Skanska touts 1550 on the Green as the most amenity-rich office building in downtown Houston, a selling point that could lure tenants to the 28-story, 375,000-square-foot tower. While law firm Norton Rose Fulbright signed a long-term lease two years ago for about 120,000 square feet, the remainder of the building — about 65% of the space — remains available for lease, according to CoStar data.

Downtown Houston’s other newest office high-rise — Texas Tower — opened in 2022 and serves as the headquarters for global developer Hines. The 47-story, 1 million-square-foot tower also markets itself as an amenity-rich building with concierge service, outdoor decks, a fitness center and access to the city's theater district, was nearly 80% leased as of late last year. That’s higher than the 68.7% direct occupancy rate for top-tier office towers in downtown Houston as of last quarter, according to Colliers.

Geographically blocked by Louisiana to the east and the Gulf of Mexico to the south, Houston has mostly expanded west and north. People moving west and north made Houston’s Energy Corridor in West Houston and the Woodlands, a suburb nearly 30 miles north of downtown Houston, more attractive for employers.

In particular, the medical office pipeline is fanning out to places like the Woodlands, Marcus & Millichap said in its 2024 office forecast for the Houston market.

Specific biotech companies relocating to the Woodlands within the past five years include CelliPont Bioscience, Obagi Cosmeceuticals, SI Group, SmartDraw and RiceBran Technologies, according to the Texas Office of the Governor. But these companies relocated to the Woodlands from California and New York, not downtown Houston.

In downtown Houston, European-based chemicals, plastics and refining company LyondellBasell will soon be one of the submarket's biggest departures. The company, citing hybrid work schedules and an attempt to reduce commute times, announced last year it plans to relocate to the 64-storyWilliams Tower in the Uptown-Galleria area, about 8 miles to the west of its namesake high-rise in the central business district. The company’s new space — 318,000 square feet — is smaller than the 366,000 square feet LyondellBasell occupies in downtown.

The shift stems in part from what McKinsey Global Institute, in a 2023 report on the effects of pandemic on real estate, found about office attendance: Nationwide, it was about 30% lower last year than prior to March 2020.

Downtown Houston, much like its Texas counterpart in Dallas, faces the additional challenge of being overbuilt in the 1980s. There were 155 new office buildings completed within 12 months in Houston in 1983, according to the Greater Houston Partnership.

The high concentration of older office structures are cookie-cutter in design and lack the amenities that tenants require these days, according to Triolet with Partners. Older Class B buildings in downtown Houston have a 42% vacancy rate these days, Triolet said.

Some of the older high-rises could be upgraded with features such as fitness centers, LEED certification or other amenities, but doing so would be expensive and the effect can be limited: “You can add these things, but it's not the same as a brand-new building,” Triolet said.

But that doesn’t mean every downtown building built decades ago is being abandoned. The 75-story JPMorgan Chase Tower, currently the tallest office building in Texas at 1,002 feet, was built in 1981 and renovated by Hines in 2021. The building originally designed by famed architect I.M. Pei is now 87% occupied, according to CoStar data. The renovations included a redesign of the outdoor plaza and first-floor lobby, complete with a glass pyramid at the entrance that was inspired by a similar I.M. Pei addition to the Louvre Museum in Paris.

Developers are also finding ways to reuse older buildings amid a changing downtown Houston. POST Houston, the 230,000-square-foot building that that served as the Barbara Jordan Post Office from 1961 to 2015, now operates as a food hall and event venue. The POST’s rooftop offers sweeping views of Houston’s downtown skyline.

Then there’s the former State National Building, a 13-story tower that was constructed in the 1920s and recently converted into a Moxy by Marriott hotel. And DeBartolo Development completed the conversion last year of the office building constructed in 1972 at 1801 Smith St. in downtown Houston into a 372-unit residential tower now known as Elev8.

All in all, the future of downtown Houston isn’t necessarily a gloomy one.

Cassie Hoeprich, the director of planning and economic development for the nonprofit organization Downtown Houston, said she and her team are seeing shifts in tenants across the city in the wake of the pandemic.

“There are certainly changes in all of Houston’s submarkets compared to a pre-pandemic Houston," she said. "What we see occurring downtown is rightsizing and a new, culture-driven approach to site selection,” Hoeprich told CoStar News in an email. “The last few years' volatility has simmered down, allowing the organization we represent and our economic development tools, property owners, and property-leasing or owning companies to lean into the new normal.”

Hoeprich added another way to understand the evolution of downtown Houston is the diversity in the types of industries setting up shop downtown. Companies that are embracing a hybrid work policy are more likely to lease space in a downtown office tower.

“We have seen lease renewals in downtown stay the course, we have seen renewals include smaller footprints — an adaptation to their new reality — and we have also seen renewals take on larger footprints,” Hoeprich said. “More importantly, we believe downtown has an important strength: Industry mix." When compared to other Houston submarkets, "we found that downtown has a more diverse industry mix per square foot."

The industries that have staying power in downtown Houston include companies that specialize in energy transition, innovation and law, Hoeprich said.

Law firms tend to gravitate toward a city's central business district, thanks to a concentration of state, local and federal courthouses or government buildings. Financial institutions, insurance firms and public service buildings also tend to have staying power in downtown areas.

While Hoeprich said 36% of downtown’s office space has been built or renovated since 2020, there's still a significant amount of dated property, according to Itziar Aguirre, CoStar’s director of market analytics for Houston.

“One of downtown’s biggest challenges is its abundance of older, not recently renovated office buildings that make it difficult to attract tenants in an era where flight to quality is very much defining the office sector these days. Add to that [downtown's] limited and expensive parking options,” Aguirre said.

Companies already in the central business district and opting to remain in downtown Houston often move a few blocks away to a higher quality space, Aguirre said. Law firms Vinson & Elkins, McGuireWoods and DLA Piper moved to Texas Tower once the 47-story high-rise opened in 2022.

The future of downtown Houston ultimately hinges on the central business district offering amenities and supporting a diverse economy, according to Hoeprich.

“Downtown needs to keep diversifying and becoming an even more dynamic, mixed-use neighborhood, as do the adjacent communities to downtown. A balance of office, housing, and entertainment across central Houston is essential for a thriving urban core,” Hoeprich said. “Much like Los Angeles, our rapidly growing region now has different, diverse hubs of office and commercial activity. At our urban core, we must continue to invest in an array of amenities.”

This article was updated May 30 to provide more details about Bechtel's Houston presence.